To me, one of the most interesting aspects of life is always hearing the contrarian view of things. I am not talking about holocaust denial or anything like that! Simply, the views of people who go against the grain and step out beyond our “two-party” view of life. One such person is Ajay Ahuja. Ajay is a successful property investor and public speaker. I have been on his email list for a long time, and even though I often disagree with some of the things he says, I have never considered cancelling my subscription. The main reason for this is that every now and then he comes out with an email alert which gets me thinking.
He managed to do that very thing the other day with one of his posts. He asked that with the Credit Crunch raging, the outlook doesn’t look good does it? He then went onto explain that for Property Investors it was actually great news. At first I couldn’t quite get it, but after a second and third reading, his points make total sense. Here is what he was trying to say, in my words:
Inflation devalues debt, so if you are highly leveraged, inflation actually helps you. This makes sense to me. To make this plainly evident, think about the old lady I saw on a Channel 4 programme last week. She had bought her property in the late 40s for £200. Now this was a pretty penny back in the post-war days but today it is a family day out! That is because inflation has slowly devalued the pound over the years. Likewise, if you are a property investor today with, say £100,000 debt, the process of inflation actually makes this less of burden as time goes on. Today the payments may be £450 per month, with your tenant paying you £500. Fast forward ten years and the payments will still be £450 but the tenant is now paying you £900. The debt lessens over time. The more leveraged you are the better you can take advantage of this phenomenon. The more savings you have, the more this process hurts you.
His second point was that if you have stayed out of the stock market then it is almost completely irrelevant to you what the stock market does. I recall watching TV in the early 90s when interest rates were sky high, and thinking to my Teenage self, “so what?” I have the same attitude today when I see Stock Market news. I don’t believe in gambling, and that is what the Stock Market is: Gambling for Rich people. If you don’t have shares in the FTSE then it is irrelevant to a certain extent. (Even if you did have shares in the FTSE, then all you need to do is sit it out until they rise again).
Ajay’s third argument was perhaps the weakest. He said that rental income is almost recession proof, and that it always rises in the medium term. I’m not so sure about this point. I moved from Scotland to England in 2004. The 3bed end terrace I moved to cost £375 a month. Now I own property all around that old place I can tell you that it still rents at £375 per month. In fairness though, generally rents have crept up over the last decade. Very slowly though.
Finally, the recession is likely to put pressure on the Bank of England to cut interest rates. This means lower mortgage payments and therefore more cash in the Investors pockets.
I could add another two arguments to Ajay’s: 1. the tightening of mortgage criteria mean that more young couples are setting up as a household in rented accommodation than in a mortgaged property; 2. the Credit Crunch has pretty much eradicated all new build projects in the UK meaning that, eventually, there is going to be more pressure on house prices than ever.
In summary then, the Credit Crunch actually aids Property Investors by devaluing debt, rewarding them for picking property over the Stock Market for their cash, rewarding them with recession proof income, keeping interest rates down, ending the new build projects and forcing young people off the property ladder.